Audit Trail

Updated on April 24, 2024
Article byWallstreetmojo Team
Edited byAnkush Jain
Reviewed byDheeraj Vaidya, CFA, FRM

Audit Trail Meaning

An audit trail is a systematic record to trace the source of financial data and provides chronological, documentary evidence of a series of activities and is therefore used to verify the accuracy of data and track transactions. The Ministry of Corporate Affairs has made it compulsory for companies to maintain an audit trail database on their accounting software.

Audit Trail Meaning

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Audit Trail (wallstreetmojo.com)

The goal of maintaining detailed documentation is to avoid errors, and unethical actions by a few individuals, prevent the account to be used by unauthorized sources, and increase internal control over the happenings within the company. It helps organizations validate and authorize, financial, business, and software transactions and help reduce material errors.

Key Takeaways

  • An audit trail is used to track transactions and evaluate data accuracy since it is a systematic record that traces the origin of financial data. It also provides chronological, documentary evidence of a sequence of activities.
  • It establishes responsibility for user behavior. It stops inaccurate information from being introduced or illegal access to information. Every user’s action is also logged, which aids in tracking any system changes or updates.
  • It offers detailed, easily accessible information that can be checked to see whether there are any errors. Since it keeps track of everything, the problem can be fixed immediately, saving time from requiring many individuals to solve it repeatedly.
  • Finding a balance between data protection and operational effectiveness can sometimes be challenging. Data loss due to improper use can be very expensive in terms of direct harm to business and reputation or legal action.

Accounting for Financial Analyst (16+ Hours Video Series)

–>> p.s. – Want to take your financial analysis to the next level? Consider our “Accounting for Financial Analyst” course, featuring in-depth case studies of McDonald’s and Colgate, and over 16 hours of video tutorials. Sharpen your skills and gain valuable insights to make smarter investment decisions.

Audit Trail Explained

An audit trail is a detailed documentation of the sequential events within an organization. These documents include financial, organizational, and business transactions within the organization. These are made mandatory by the regulatory authorities for companies as it eliminates material errors, unauthorized usage, and malpractices.

Audit trail research answers three basic questions-

  • What was the event?
  • Who has launched/initiated the event?
  • The date and time of the event?

Audit trail information should be stored in a secured location to ensure no data is susceptible to tampering and mishandling.

There should be a timely and regular backup of this trial since electronic devices are always at risk of malfunctioning or being completely unusable.

Only useful information should be collected to avoid heavy storage cost and ease of finding data as and when it is required by the management, auditors, or regulatory authorities.

Audit logs should be reviewed at regular intervals to avoid any errors or unethical practices in their maintenance.

Examples

Let us understand the audit trail database in detail with the help of a few examples. This will help us understand the intricate details of the concept.

Example #1

What would be an audit trail for carton buy transaction?

Solution –

It will consist of a receipt having details of cash paid in exchange for carton, the date of the transaction, and the place from where it is bought.

Example #2

A company wants to buy a laptop for employees. What all would be included in an audit trail?

Solution –

The finance team will generate a purchase order to authorize a purchase. The store from which laptop is purchased will give the bill having details of the date of sale, amount, and description of the item purchased. All these documents will consist of an audit trail.

Example #3

The Consolidated Audit Trail (CAT) was approved by the Securities and Exchange Commission (SEC) in the United States in November 2016. However, it has faced multiple delays since its approval.

Even until 2022, the system was not implemented and the Securities Industry and Financial Market Association (SIFMA) justifying the delay said that they want to get it right before it is launched and made public.

Advantages

Different users use it differently, depending on the requirements. However, the advantages of audit trail research and maintenance mentioned below are a few of the most important factors why companies take the extra effort to maintain them.

Audit Trail - Advantages

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Audit Trail (wallstreetmojo.com)

  • Accountability: It sets accountability in terms of the actions of users. It prevents the introduction of improper information or unauthorized access to information. Further, every action of the user is recorded, which helps in tracing respective changes/modifications in the system.
  • Reconstruction of Events: It can revive entire information and trace the basic details related to an event of who, when, and what. It helps in the detection of source problems and rectification of the same to prevent future occurrences.
  • Intrusion Detection: It helps in identifying unauthorized access. Many regulations have made it mandatory for maintaining data confidentiality. It extends to the protection of intellectual property, financial records, personal information, etc.
  • Problem Identification: Through real-time monitoring, audit logs identify problems that indicate operational issues, unusual or suspicious activities, or system errors.
  • Prevent fraud- When proper records are maintained, it is easy to detect inconsistency. Also, since the users know that transactions are recorded and traceable, likely, they wouldn’t attempt such activity.
  • Helps in audits- For most of the businesses, an audit is compulsory. When the trail is maintained for every transaction properly, it becomes easy for the auditors to determine the validity. It makes audit time and cost-effective. It also helps the auditors to rely on the internal controls of the company and help decide the ambit of the audit.
  • Identification and correction of errors- It provides comprehensive and readily available information that can be examined easily to find out mistakes, if any.  Since it tracks everything, the mistake can be corrected at once and saves the time of multiple people fixing the error numerous times.
  • Adherence to regulatory standards- To adhere to the regulatory standard, it’s crucial to maintain an audit trail. It helps in understanding the substance of transactions as and when required for legal purposes.
  • Loan documents- Lenders require some proof of revenue and cash flows before extending loans to a company. This trail keeps a detailed record of transactions that can help in providing necessary documents.

Limitations

Despite the multiple advantages, there are a few factors that prove to be a hassle for users and regulators. Let us discuss the disadvantages of audit trail database through the points below.

  • Challenge in maintaining audit trail including location used for access and storage
  • The data logs can be heavy, which leads to an increase in storage costs.
  • It sometimes gets difficult to strike a balance between data protection and operational performance.
  • Losses of data through inappropriate use can cost a lot with direct damage to profits and reputation or legal action.

Frequently Asked Questions (FAQs)

1. What are the audit trail’s steps?

Typically, an audit trail starts with the receipt of the invoice. After then, the transaction is traced back through accounts payable to the cheque or electronic payment used to settle the balance.

2. What does an audit trail serve as?

An audit trail evaluates and validates financial, software, and business transactions by monitoring user behavior. An audit log also aids businesses in finding errors, fraud, and unauthorized access.

Who is in charge of the audit trails?

Both internal and external auditors can follow transactions through an accounting system using an audit trail. The accounting team can also utilize an audit trail to find faults and the reasons behind financial statement variations.

This has been a guide to the Audit Trail and its meaning. Here we explain the audit trail process examples, advantages, and disadvantages in detail. You can learn more about auditing from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *